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Greenspan: Economy in ‘soft patch’

Federal Reserve Chairman Alan Greenspan said Wednesday he expects the economy to emerge from its current “soft spot” without further stimulus. By Martin Wolk.
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Federal Reserve Chairman Alan Greenspan said Wednesday he expects the economy to emerge from its current “soft spot” without further stimulus, but he cautioned that business prospects remain depressed by war worries and falling stock prices.

In his first extensive comments about the economy in several months, Greenspan defended last week’s larger-than-expected interest rate cut, calling it affordable “insurance” to prevent a double-dip recession, which he described as unlikely.

“The actions taken last week to ease monetary policy should prove helpful as the economy works its way through this current soft spot,” Greenspan said in testimony to Congress’ Joint Economic Committee. He added that the central bank could easily take back the rate cut if the economy shows signs of picking up momentum.

So far that does not appear too likely in the near term. Many analysts expect economic growth to slow to a near crawl in the current quarter, although Greenspan said in response to question he sees “no evidence” of an accelerating downturn.


“What we do have is a very large degree of uncertainty,” he said. “So if I were to assume that the outlook is exactly what the most probable path is, then I would say no additional stimulus is necessary.”

Greenspan’s cautious optimism lifted stocks briefly, although broad stock indices ended mixed after a seesaw session. Analysts said Greenspan’s prepared testimony largely echoed a statement issued by Fed policy-makers explaining their decision to cut a benchmark short-term rate by half a percentage point Nov. 6.

But the Fed chief also struck a reassuring note in responding to concerns the central bank could become powerless if the U.S. were to enter a period of broad deflation along the lines of what Japan has experienced, said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

“He was pretty emphatic about both of those, saying the risks of deflation are very low, and that there is plenty the Fed could do,” even in the unlikely case central bankers were forced to lower the benchmark federal funds rate all the way to zero from its current historically low level of 1.25 percent.


Greenspan said that if the Fed were to run out of interest rate ammunition, the central bank still could attempt to stimulate the economy by buying long-term government securities, as many analysts have urged the Bank of Japan to do over the years.

But many analysts believe the Fed is at or near the end of its long rate-cutting cycle, which has seen the central bank cut short-term rates 12 times since January 2001. The Fed itself strongly signaled it is unlikely to move again anytime soon, declaring last week that after the latest rate cut that economic risks are now “balanced.”

“Unless more shocks hit the economy in coming months, we believe the Fed is done cutting rates,” said Merrill Lynch senior economist Gerald Cohen.

Vince Boberski, senior economist at RBC Dain Rauscher, said the impact of the latest move is likely to be largely psychological, given that short- and long-term interest rates are at their lowest levels in a generation. Automakers and retailers already are able to offer zero-percent financing virtually at will, although lower interest rates will allow them to do so at less cost.

“I think Chairman Greenspan is very mindful of what his legacy is going to be, and if he is going to err, he is going to err on the on the side of being too easy,” Boberski said. “I don’t think he wants to end his watch at the fed with a double-dip recession.”


Crescenzi agreed that in convincing inflation-wary central bankers on the wisdom of a half-point rate cut, Greenspan, 76, was able to trade on his record of shepherding the U.S. economy through a long period of low inflation since taking over as Fed chief in 1987.

While Greenspan was cautious about current conditions, he said he saw none of the usual signs that accompany the beginning of a recession. The economy fell into its first recession in a decade last year, and most analysts believe the downturn ended late in the year or early in 2002. But growth has been choppy, and because the downturn was relatively mild, the early stages of expansion also have been subdued.

“Although economic growth was relatively well-maintained over the last year, several forces have continued to weigh on the economy,” Greenspan said. He cited a slow recovery in capital spending, fallout from corporate scandals, sliding stock markets and fears about a possible U.S. attack on Iraq.

“Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch,” he added.

Greenspan said that even with the current slowdown, the U.S. economy has proven its adaptability over the past year since the Sept. 11, 2001 terrorist attacks, managing to grow at an average rate of 3 percent over since the fourth quarter of 2001.

“A year ago, we were struggling to understand the potential economic consequences of the events of Sept. 11,” Greenspan said. “The United States economy, however, proved to be remarkably resilient.”

At the White House, President Bush told reporters he agreed with Greenspan that the economy was in a rough spot.

“He uses the word soft spot. I use the words bumping along. Both of us understand that our economy is not nearly as strong as it’s going to be,” Bush said. “Our job here in Washington is to create the environment necessary for people to feel confident about risking capital.”

Bush, whose Republican party won control of both houses of Congress in Nov. 5 elections, said he wanted to discuss new ways to spur growth when a new Congress convenes in January.

The Associated Press and Reuters contributed to this report.